Another tax break for investors

Investors’ Relief (‘IR’) is a relatively new tax relief available to investors who sell shares in unlisted trading companies.

This tax relief shares many similarities with Entrepreneurs’ Relief (‘ER’) – under both reliefs there is a 10% capital gains tax rate available (as opposed to 20% for higher rate taxpayers) & both have a lifetime limit of up to £10 million.

On the basis of the above then there doesn’t appear to be a need for IR!

However, we have recently advised on a number of transactions where the shareholder group included a number of investors who held less than 5% of the company  – making them ineligible for ER. This is where IR comes in.

Investors’ relief doesn’t require a minimum shareholding, & therefore a 10% capital gains tax relief is still possible, with the appropriate planning & advice.

IR applies to new ordinary shares issued on or after 17 March 2016. The relief requires that shares are held continuously for three years – in other words the first IR claim will be made in the 2019/20 tax year…..so now is the time to plan for this, given that it’s only a few months away.

There are a few other simple rules to follow on IR – the most notable one being that the investor should not be a paid employee of the investing company, although they can act as a director of the company.

IR may also provide a ‘next best alternative’ to the other excellent tax reliefs available: Enterprise Investment Scheme (‘EIS’) and Seed Enterprise Investment Scheme (‘SEIS’).

Whilst EIS/SEIS may offer more tax benefits, there are several conditions which must be met in order to qualify, & as a result these options may be too cumbersome for some investors.

IR can also be treated as a top-up to ER i.e. having 2 x £10 million of gains by utilising both tax reliefs.

The team at Alexander Knight & Co is hugely experienced in advising on capital gains tax cases.

If you’d like a second opinion, or just some idea of which options could work for you then contact Murray Patt.